Rebound in business confidence expected

Elections don’t usually embolden businesses to start spending but the Coalition victory on Saturday night could have a meaningful impact on the Australian economy.

As the Reserve Bank of Australia witnesses the currency edge above US92¢ again on impressive China economic data and a diminished case for tapering this month, Bank of America-Merrill Lynch chief economist
Saul Eslake
says the central bank can almost certainly count on a timely improvement in business confidence.

“Elections don’t usually have an impact on business confidence. This one probably will, such has been the breadth and depth of the antipathy in the business community towards the outgoing government.

“That in turn is significant because [RBA governor]
Glenn Stevens
has fingered the low level of business confidence as a key reason for the sluggish response of economic activity to the easing of monetary policy over the last 18 months or so."

“I think A, it’s likely that there will be a rebound in business confidence fairly quickly; B, the Reserve Bank will want to see whether that is sustained and leads to an increase in non-mining business investment – which it has been hoping for – and C, it’s going to be another two to three months before it can make that judgment."

New business spending data is not due until the next capital spending survey at the end of November. Inevitably, this has a less desirable impact on foreign exchange markets.

“I think the market reaction will be to downgrade the possibility of further rate cuts in the near term, possibly pull out whatever expectation there was for one in November . . . and the two consequences of that in my view are that the spread between Australian and US bond yields will widen and the dollar should be stronger."

Traders are pricing in a 12 per cent chance of a rate cut at the next meeting in October.